Surprisingly (or maybe not…) the Internal Revenue Code does not state specific expenses that can be deducted from your business. It does say “all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business” which leaves some room for interpretation. Continue reading to find out more about writing off business expenses.
The Basics
Generally speaking, an ordinary expense is anything common to your particular business. For example, an alarm system would be common to a retail business. A necessary expense is one that is helpful or appropriate to your business. A restaurant keeping an EpiPen and first aid items on hand would be an example of a necessary expense.
For an expense to be deductible it needs to be both ordinary and necessary. The expense would also need to be considered reasonable i.e. that EpiPen is fine but a diamond studded one wouldn’t be reasonable.
What Wouldn’t Count?
It is common for the IRS to disagree with taxpayers on what qualifies as ordinary and necessary.
If you decide that work travel should be done on a private jet you might run into trouble. While that might not be reasonable it is likely also not ordinary or necessary if you can fly commercial to your destinations.
Another one might be legal fees paid in protecting your share of a company in a divorce. The legal fees would be considered personal and not a business expense.
Household Employment
Household employers are in a different situation. Since there is no business filing needed and there is no revenue, profit, or loss, there can’t be any business expense deductions. Sometimes people ask us if they can deduct the cost of food for their nanny or something like that, unfortunately the answer there is no.
Think before you Deduct
Some expenses are clearly deductible and some are more questionable. If something seems personal and extravagant you might want to think twice about claiming it as a business expense.